Are you a passive investor seeking strategies to maximize your tax benefits and enhance your investments? Join seasoned financial experts Neil Henderson, Matt MacFarland, and Amanda Han as they reveal the secrets of tax-efficient investing in this eye-opening episode. Discover the Lazy Man's 1031 Exchange, the potential benefits of Opportunity Zones, and how to successfully navigate the complex world of syndications. If you're ready to transform your investment approach and build a more profitable future, hit play and unlock the power of smart tax planning!

Key Takeaways

• Real estate syndications offer tax-saving opportunities through accelerated depreciation and cost segregation studies. By generating losses to offset gains, passive investors can benefit from a reduced tax burden.
• To maximize tax savings with real estate syndications, passive investors should consider investing in projects that conduct cost segregation studies. This will allow them to take advantage of the accelerated depreciation, which can help offset taxable income from other sources.
• Passive investors in real estate syndications can take advantage of tax deferral strategies such as the "Lazy Man's 1031 Exchange." This involves reinvesting distribution gains from one syndication into another within the same tax year, thus offsetting the capital gains and minimizing tax liability.
• When evaluating potential investments in opportunity zones, passive investors should look for projects that not only defer taxes on capital gains but also offer the potential for tax-free appreciation over a long-term investment horizon.
• For passive investors seeking to minimize tax liability, it's crucial to work with experienced tax professionals who understand the complex rules and regulations governing syndications and can help them navigate tax-saving strategies effectively.
• Tax planning is essential for passive investors in real estate syndications. Stay in touch with your tax professional throughout the year. Don’t wait until tax season to communicate with them.

Time Stamps

[00:00] Intro

[01:19] Passive investor tax benefits

[02:11] Cost segregation & depreciation

[04:30] Real estate syndications & 1031 exchange

[07:52] Lazy Man's 1031 exchange explained

[10:26] Challenges in 1031 exchange & syndications

[14:28] Opportunity Zones & tax Benefits for passive investors

[18:22] Timing investments to offset capital gains

[20:53] Evaluating potential investments in opportunity zones

[22:18] Long-term benefits of opportunity zone investments

[24:30] Understanding TICs (Tenants in Common) in Syndications

[26:45] Role of cost segregation studies in maximizing tax savings

[28:16] How passive investors can reinvest their capital gains

[30:12] The importance of tax planning in real estate syndications

[32:08] Creating a tax-efficient investment strategy

[33:55] Key takeaways on maximizing tax benefits in passive real estate investing

[35:22] Closing thoughts and future strategies for passive investors

[37:00] Outro

Resources and Links Mentioned

Website: Keystone CPA

Book: The Book on Tax Strategies for the Savvy Real Estate Investor: Powerful techniques anyone can use to deduct more, invest smarter, and pay far less to the IRS!

Amanda Han's Facebook page

@amanda_han_cpa on Instagram

@AmandaHanCPA on X

Amanda Han on YouTube

Support Our Show Follow us on Twitter @trulypassive Follow us on Facebook at TrulyPassiveInc Follow us on TikTok @TrulyPassiveIncome Sign up for our FREE Passive Investor Course

Are you struggling to optimize your passive investments and

wondering how to take advantage of tax benefits without getting tangled

in the complexities of the system?

In today's episode, we're joined by tax strategist, Matt McFarland, and Amanda

Han as they share their expertise on tax efficient investing strategies.

Get ready to learn about the lazy man's 10 31 exchange, navigating opportunities,

zones and maximizing syndication benefits.

Welcome to the Truly Passive Income Podcast.

I'm Neil.

I'm flying solo today.

But I am here with Amanda Han and Matt McFarland, CPAs and tax strategists

who specialize in helping people use real estate to save massive amounts in

taxes and keep their hard-earned money.

So Amanda and Matt, thank you so much for joining us today.

So let me start by asking you how you got into real estate.

CPAs can have a varied background, but real estate's is a little bit

more of a specialized, niche of it.

Yeah, my exposure to real estate actually started

with when I started my career at a big four accounting firm.

It was, I just remember, I was probably a couple years in and my aha moment happened

when I was reviewing a gentleman's tax return and he was probably in his.

Sixties, he was retired, just investing in real estate and you're looking

at his tax return and then you add back to depreciation cuz you know

it's expense he's not paying for.

And then you quickly realize that this, 60 something year old, and

this is 25 years ago, this person was making over $200,000 in cash flow

as a retired, 60 year old investor.

and not paying any taxes, and so that's when the light bulb went off

for me that there was something there.

And then when Matt, when did you, that was 25 years ago.

So that was when you started?

Yeah, this was started off, this was 19.

I started in 90, 98.

That was probably a couple years in.

So maybe 2000, something like that.

I was a senior.

It was couple years into my career.

And what about you, Amanda?

I mean on a similar no, at, one of the big four, which is

where we met and, I happened to end up in the real estate specialty group.

So my clients were all of the large real estate investment firms,

developers and things like that.

And, so yeah, it's what I did day in and day out and Matt

and I had a lot of overlap.

In our career at Deloitte, because I worked on the real estate

investment side, and he was on the high net worth individual side.

and those are the same, same people usually, right?

the business is real estate and the individuals, the wealthy

individual paying taxes.

a lot of crossover there.

But we didn't really start investing.

On our own until, many years later.

I think like many people who, read Rich Dad, Poor Dad was the first time that

we thought, Hey, we can do this too.

It doesn't have to be just for our clients that we work on.

So as I said before we were starting off, our audience

is primarily passive investors.

What are some of the key tax benefits of investing passively in a real estate

syndication as limited partners, and how can individuals maximize those benefits?

Yeah, it's a great question.

I mean, I think the first one that comes to my mind is, I think people

don't always look at it like this, but it's, investing in real estate

syndications, obviously the goal is for that real estate to generate cash flow.

But, a lot of times early on that cash flow was, is sheltered

by depreciation losses.

you may get, as a passive investor, you might get a distribution check of

$10,000, but your K-1, it's not gonna show $10,000 of income, it might show zero.

It might even show a loss.

So I think that's one of the main benefits, that people need to, not

forget about, is when they're investing in these passive syndications that a

lot of times they're getting cash flow and it's sheltered from taxes for at

least the first couple years for sure.

does the choice of legal entity an LLC, LP or S-Corp affect how

the passive investors tax liability is and what factors should they consider

when they're making that decision?

Yeah, that's a great question.

purely from a tax perspective, it doesn't make a difference at all.

one of the benefits of being a passive investor is that generally there's

already asset protection built in, right?

The property, the fund, the syndication is already in an LLC itself.

on the tax side, we are not very concerned with, needing another level entity.

it's oftentimes that just creates more paperwork than necessary.

Matt said, the benefits that you typically see on a syndication investment, whether

that's the fund maximizing write-offs or depreciation cost segregation, they all

come to the passive investor in the, a pretty package on the K-1 all wrapped up.

so the investor doesn't even have to do anything.

in order to get that tax benefit on the K-1, right?

And so this is true regardless of whether the passive investor is investing in their

personal name or in an LLC that they own.

we even have investors who invest using their retirement account,

like a self-directed IRA or 401k.

and so in all those scenarios, basically what we get at the

passive investor is the K-1.

That already reflects all of the strategies on the fund

level, which is reducing the rental income for tax purposes.

Gotcha.

two, I want to get to the IRA, investing here in just a moment, but I wanna

follow, I wanna backtrack just a bit and get you to explain a little bit.

For maybe who's somebody's who's new to investing in real estate,

how the depreciation works for passive real estate investments.

depreciation's kind of what we jokingly refer

to as ninth one of the world.

when you buy rental real estate, whether it's you're on your own or

passives, syndications buying the rental real estate, obviously the

goal is for it to go up in value.

It's to generate positive cash flow.

But from a tax perspective, the IRS actually allows you to write off a portion

of that purchase price every year as if, because of normal wear and tear.

So as as if it's depreciating in value, right?

now that depreciation's based on the purchase price.

So it's not, a lot of times you'll see the syndications, they'll

buy a 5 million property, but they've raised a million bucks.

the depreciations calculation starts at 5 million, not the million

dollars the investors put in.

and That's why I was talking, it's like a paper write off where it's, it's maybe

something the bank, has paid for part or, good chunk of it, but you still get

to write that off on the taxes every year against that positive cash flow.

that's the way where investors, whether again, passively through

syndication or on their own, can use that depreciation and kind of,

offset the income from that property.

Does it cross over into other assets that you own?

I've often heard depreciation sometimes described as a bucket.

you get a big bucket of depreciation and then when you choose to

take it is often up to you.

Is that correct?

It depends.

So if I have a single family home, my own rental property, there is some control,

not in whether I take depreciation or not, but there's some control

over how quickly I take depreciation.

for example, if I'm not able to use the loss, so I don't really need the loss.

I might just take regular depreciation.

So meaning the building, I'll just depreciate over 27 and a half years.

Slow and steady.

But if I'm someone who can utilize, the upfront depreciation, I could do a cost

segregation and accelerate that, right?

So that's where our choice comes in.

whether taking it, in the normal sense or accelerating that benefit, with respect

to passive investors of syndications.

unfortunately, the choice is not made by the passive investor, right?

Just like with the investment decision, usually that is made at the fund level,

so the sponsor group, the gps are gonna be the one to decide whether we're gonna

take accelerate depreciation or not.

Now, when the K-1 comes to the investor, that's where the strategy will come in.

so let's say I was a passive investor and I got this, great distributions

and my K-1 shows a tax loss.

I'm really happy.

Now the next question is, what kind of income can that K-1 loss offset?

Is it just my other rental income?

Is it other passive income I have?

Is it my W2 income?

that level of planning is something that each investor should be doing with their

own CPA, to figure out, when and how is the best way to utilize that benefit.

Gotcha.

And that was my next question is it possible to offset W2 income with.

Losses from passive real estate investments.

And I know what you're gonna say.

It depends.

So I'll just, we'll start there.

Did you read the, did you read the sign

behind us that says It depends?

Yes.

yeah, there are ways that people can use passive

real estate syndication losses to offset W-2 or other types of income.

Generally they do need to be, qualified as what's called a real

estate professional for tax purposes.

and that, that's gonna require them to have probably their own properties,

their own long term rentals where they're spending time on those.

But if they can qualify and they have that, the right facts and

circumstances, then yeah, they're investing in the side and these passive

syndications that are kicking off, K-1 losses because of depreciation early

years, they can definitely use that depreciation in the right circumstance

to offset their other income as well.

Gotcha.

But it's not gonna work for a doctor or a lawyer, somebody who's not active

real estate professional, correct?

Probably not in that scenario.

But to change the facts a little bit, what if that doctor is investing passively in

those deals and he's got their own passive real estate investments, not a real

estate professional, but they're just, they've got their own rental properties.

Maybe those are showing positive income, they could definitely use the

losses from the syndication to offset the income from their own rentals

and thereby sheltering the taxes they were gonna pay on those for sure.

And we also see like, if this doctor, is married, right?

Or, and so maybe they're still working full-time, but their spouse.

Is the one dealing with their own smaller portfolio of properties.

and so yeah, if the spouse is a real estate professional, she met the right

number of hours on the real estate activities, then it is possible to, also

invest in syndications and use those losses against the physician income.

We see that actually a lot.

So a lot of clients, because to invest in most syndications, you

have to be accredited, right?

Which means somebody is, either has a lot of assets or making high income, and

what we often see is people say, oh yeah, I wanna be a real estate professional.

I wanna have a bunch of rentals of my own.

And then I'm, able to use the losses against the, the income.

But over time people get fatigued, right?

Like, okay, I had three rentals, it was great.

Now I have six rentals, and then I, next year I'd have 10.

Cuz I keep chasing that tax benefit.

So this is where syndications work really well, because if, again, like Matt said,

if you're a real estate professional with your own portfolios, then you can

always scale up by investing in more passive syndications to continue to

get a tax benefit without creating a full-time real estate job for yourself.

Gotcha.

Gotcha.

Alright, so you wrote a book called Tax Strategies for the

Savvy Real Estate Investor.

It's a very well-known book in the real estate community.

And in your book you discuss the use of self-directed IRAs

for real estate investments.

Can you elaborate on how individuals can leverage those self-directed IRAs

to invest in real estate syndications, while taking advantage of the

tax deferred or tax-free growth?

Yeah, I mean it's definitely something, an area that a

lot of our clients take advantage of.

taking kind of a step back, I think the way to look at it, obviously,

people are, they have retirement accounts, they're investing, and,

most of the time people are investing in stocks, bonds, mutual funds, but

it's not stuff that they can control.

It's not stuff that they know necessarily.

It's just putting in the hands of somebody else, and letting

whatever happens, happens.

Uh, which is fine.

Obviously.

It's, But the way we talk to our clients about is, a lot of our clients,

probably 85, 90% of our clients are involved in real estate to some extent.

So they, that's their knowledge base, right?

so we talk to our clients about looking at, why not use your retirement account to

invest in something that you understand?

And maybe to some extent can control, or, you have a better grasp on that

market than the mutual funds, right?

now whether you're.

You've got your money in your IRA already, whether it invests in stock bonds and

mutual funds or real estate really comes down to where do you think it's

gonna get a better return on your money.

That's one thing.

And then, again, clients seem to understand the real estate side of

things better, so that's why our clients like to use their IRAs or

retirement accounts to invest in kind of alternative assets as we call it.

But at the same time, yeah, they're still you.

they, they can still put money into their retirement account, potentially take a

tax initially when the money goes in.

That money will grow tax deferred, is it investing?

And then, depending on what type of account is, when you pull it out,

you may pay taxes or it may not.

If it's you know, it's a Roth.

a couple different ways to, slice it and dice it, I guess.

So one of the challenges, I know you sometimes face

investing in real estate with an IRA or any kind of retirement account, is

UBIT (Unrelated Business Income Tax)?

Income tax.

Yeah.

Yeah.

Can you describe, can you describe for people what that is and maybe

some strategies for not getting hurt too

bad by that?

Yeah.

UBIT is, one of those quirky things, in the retirement world where if

your retirement account invests in certain types of assets, even though

it's a retirement account and it's supposed to be tax deferred, tax free.

if it's investing in certain types of assets, then it

may pay taxes along the way.

So one example outside of real estate would just be like, I don't know

if your retirement account invested in a Subway franchise or something.

It was one of the owners that was, it was a setup as a partnership and your

retirement account was getting a K-1 cuz they were operating a business.

That type of income in your retirement account, K-1 would

be subject to this UBIT tax.

Now in the real estate world, retirement accounts that they invest in what they

call leveraged rental real estate.

those are situations where the retirement account, if the rental property was

kicking off a profit after, doing the normal expenses and depreciation,

if there was a profit, then their retirement account may have to pay a

tax on the kind of debt finance or the leverage part of that profit every year.

if Buy a property for $500,000, there's a loan of two 50, there's

50% leverage in that situation.

So any dollar profit that that rental property would

make, the IRA would've to pay.

50% of that would be subject to this kind of UBIT tax that you were referring to.

Yeah.

I think that one thing I wanna add is, a lot of people, or a lot of

advisors actually, Recommend or try to have people stay away from using

retirement money for real estate.

but something really important to know is that UBIT tax is

assessed on taxable income.

So you can use things like depreciation and things like

that to offset the current tax.

so we really don't.

in practice, that becomes a problem.

usually sometimes later on in the life cycle of an investment

or upon the sale, right?

when you have a property, you sell at the very end for a larger gain.

but I think, like Matt said earlier, it's really about comparing the total return

on investment right after factoring the tax cost, rather than just saying, never

use retirement account for real estate.

Yeah.

That's often what I tell people is "oh, you know, I, I, I'll have to pay UBIT.

And I'm like, do the math.

there's depreciation, you're probably still gonna end up with a better

return than you might end up with investing in the stock market.

It's kind of how I look at it.

Yeah.

that's exactly, you look at the math, it's Hey, my return on investment was 5%

in the stock market in a mutual funds, and after, even if I paid UBIT and

my IRA's return on investment was 7%.

obviously you still came out ahead, right?

yeah, it's just people, sometimes people

they're overly tax sensitive.

I don't wanna pay any taxes at all.

You're stepping over dollars to, pick up dimes or what it is.

so we've talked about depreciation, but at the end, when you sell an asset, a

lot of times it's going to be subject to depreciation recapture correct?

Yep.

And how, what, how are some ways that investors,

especially passive investors, can plan for that, offset it.

Talk to me.

I think it's really important for investors, for even

passive investors to be aware and or dialed in into what the plans are

with respect to a syndication asset.

so if, I invested in an apartments syndication, and I know it's going

to exit sometime this year, that it's a really good idea for me to do some

tax planning with my own cpa, right?

So for example, I'm expecting, $80,000 capital gains from the sale real estate.

What are some of the ways I can reduce it, right?

Because that kind of planning is done at my level of investor.

The syndication is not gonna do the planning.

couple different things to look at.

for those people who are passive investors, where, not real estate

professional had not been able to use losses before, what, here's where the

good news is that all those losses that you received from K-1s and prior

years, Can potentially be used to offset this upcoming $80,000 gain.

or if you're someone who has your own rental properties, that are, single

family duplexes that are kicking off losses, whether, naturally from

depreciation or manufactured through accelerated depreciation, those losses

can also likely offset the capital gains from the syllabus syndication asset.

Yeah, I think, people hear that term depreciation

recapture and get scared and.

it is, part of it is part of the overall capital gain on the sale of an asset.

It, it is taxed slightly higher, generally speaking than the regular

long-term capital gains rate.

But keep in mind, a lot of these, you probably see this too, right?

A lot of these investors in these syndications are wealthy, high income

people, they're, a higher tax bracket.

So that upfront deduction they're getting probably is saving them

at 32, 35, 37 cents on the dollar, where the depreciation capture

from the back end is only at.

A lot of times 25%.

So you're still coming out ahead, in the right circumstances.

but again, it's all part of that capital gains.

So it all goes back to, at the end of the day, it goes back to the planning

of how are we gonna offset the overall capital gains and, it's gonna shelter

that and the capital gains and.

What are some other things we can do from a timing perspective to

reinvest money in here or there?

What, whatever the case may be.

Whatever the planning strategy

is.

Yeah.

what we call a lazy 1031 exchange.

so if you've invested syndication, number one, that exits well, you can take the

money and reinvest in another syndication.

and then, the new, the second syndication kicks off losses within the same

year, then they can offset each other or even, harvesting stock losses

if you had stock or crypto losses.

Those are capital losses that potentially offset the capital

gains up the syndication too.

so many great ways to offset or defer the tax, that, like Matt said, you don't

have to be super scared of this word.

It's depreciation recapture, which unfortunately a lot

of CPAs have that narrative.

It's funny, I was talking to a client yesterday and I mentioned

the, this, that's lazy man's 1031.

It got translated from me saying lazy man to them saying Poor man's 1031.

I was like, I don't know if it's, doesn't have to be a poor man's 1031, but yeah.

Yeah.

alright, so I wanna learn more about, what you're talking

about there, but I want to reiterate something you said there as a key

takeaway for people is that if you're in a syndication, As soon as you know

there's going to be an exit, you need to sit down with your tax professional,

your tax strategist, and start planning.

don't wait until, tax season all just go, oh yeah, I had three exits last year.

what should we do?

the first time we hear about it, it shouldn't

be when you're sending me your K-1 in, March or April, right?

Yeah.

Yeah.

so we work with investors on both sides.

We have clients who are syndicators and we have clients

who are the passive investors.

And something we always tell our syndication clients are is, if you're

planning exit, make sure you let your investors know ahead of time

so that they can be anticipating.

That, we've even seen it where if a deal is very close to exiting at the

end of the year, like middle December.

then looking for ways to delay that gain even just by a couple

weeks because same thing, right?

if we don't sell until the end of the year, the investor has almost

no type to plan, but if we delay it by a couple weeks, now they have

all of the following year to try to plan for write offs at the time.

Gotcha.

That's brilliant.

Not always possible to do and if you're having a, somebody trying to buy your

syndication, but, alright, so we are, we're having a lot of conversations

these days with 1031 people, and I know that one of the challenges with doing

a 1031 out of a syndication is that you normally you have to the entity,

you have to stay within that entity.

Is, let's say it's, main Street Storage, llc, and then, all the

investors are a part of that llc.

And then basically that they sell and they ask everyone, Hey, do you

want to move on to a 1031 exchange?

If they don't, they buy out the people who don't.

But the people who do they, then that asset goes ahead and

buys another, facility, another property as a 1031 exchange.

But beyond that, it gets very, very tricky to my understanding.

And I'm certainly no 1031 pro.

Getting your money into a syndication via a 1031 exchange gets really

complicated because you're having to deal with TICs, tenants in common.

You're, you gotta replace the debt.

And, but, so talk to me about the lazy man.

1031, this sounds very intriguing to me, not the poor man's 1031.

yeah.

to your point, with syndications those situations can be difficult because

there'll be times where, yeah, that Main Street Storage LLC has got 50 investors

and 20 of 'em don't want to continue investing with Main Street Storage, LLC.

They want to cash out and move on with their lives, right?

sometimes to accommodate that, maybe, maybe let's say Main Street

storage, decides, we're not, we're just gonna sell, we're not gonna

do 1031, so all the investors get K-1s with capital gains on it.

maybe those investors that wanted to say continue investing and didn't

want to pay taxes on the gain, what they could do is take that money,

that distribution they got from that partnership and before year end, go

and invest in maybe another syndication that's gonna do a cost segregation study

to generate, accelerated depreciation kick off losses to that investor.

And then they've done in the same, they've timed it right in the same tax year.

So they've got one K-1 with a large loss, one with some gain, and maybe

if the numbers work out, they've boss offset each other for, to most extent.

So how can passive investors take advantage of the tax

benefits offered by opportunity zones and what should they look for when evaluating,

potential investments in these zones?

Yeah, the, the way the, uh, you know, so to your point,

the opportunity zone only came out, I think at the end of 17 or something.

So it's only five, six years old.

That's part of the reason it's totally brand new.

It never existed before, the way an investor takes advantage of it,

they've gotta have, they've gotta have a taxable recognition event,

generating capital gains from something.

They're selling stocks, they're selling a rental property, they sell a business

or exit from one syndication.

Yeah, some.

So they've got capital gains income that they're looking to, I don't wanna pay tax

on it right now, so I reinvest that into a qualified opportunity zone investment.

It could be a syndication, could be their own for that matter.

but something that, you know, that syndications going out buying an

asset in an opportunity zone, the benefits to the investor that's

basically twofold is they've been able to defer the taxes that they would

otherwise have to pay on the front end.

and, they can defer and that, you know, they have to basically

come due with the taxes in 2026.

six years ago, this is a longer deferral period.

Now we're a little bit shorter, right?

But, the benefit is still there.

They can defer the tax a couple years, but the big carrot that they're dangling

is, If they keep their money in that investment and the syndication keeps

their opportunities on investments for at least 10 years, the appreciation

on that replacement property can become totally tax free when it's

sold eventually down the road.

so that, in the right circumstances, if there's an investor in,

likes the marketplace, likes the investment and is not gonna need

that cash, for 10 years per se.

Is okay with that investment sitting there for 10 years and thinks the

appreciation's gonna be there, then that can, definitely make sense.

but I, you know, obviously there's a couple, there's other requirements and

things and hurdles, but that's, I think, probably one of the big things that an

investor needs to look at is, what's that time 10 year timeframe look like,

Yeah.

I think the O-zone (Opportunity Zone) works really well for,

we've seen it like, okay, one, uh, syndication investment exit.

And I don't have other ways to defer taxes.

I'm gonna invest in another syndication that's like a opportunity zone.

we see that a lot in kind of failed or partially failed 1031 exchanges.

So someone, tried to do a 1031, but something happened,

it didn't work out as planned.

Now I have this gain.

I could still defer via opportunity zone.

I think one of the, probably a couple of the bigger plays here, that we see

with clients is sale of businesses.

So you have a doctor or you have, an attorney selling their practice.

And for those, for the most part you can't really 1031 exchange.

So opportunity zone's a great way to defer the taxes on that,

or, stock transactions as well.

A similar note.

something that we've experienced and you've

mentioned failed 1031 exchanges.

Sometimes we've had people sort of in the process of trying to do a 1031

exchange and maybe they're getting close to their deadline and then they're, not

sure that it's gonna work out or not.

And then an opportunity zone pops up.

And one of the things that, that I understand they can do is.

Go ahead and cancel the 1031 exchange, take the gains, and now what sort of

window do you interpret that they have to then reinvest in that opportunity zone?

I think this is one of those where you said if you ask

a couple different CPAs, you'll get a bunch of different answers.

Right.

So, I think it depends, but I think the way we typically look at it

is, that 180 day period for the Opportunity Zone investments starts

at the date of the failed 1031.

because that's the date that triggers the actual gain, right?

Prior to me failing a 1031 exchange.

I was still in this transaction where I'm trying to defer the taxes, but

yeah, that's kind of a difficult call and I think you'll get different

answers depending on which CPA you ask.

So the best person to ask is, as an investor, right?

The best person to ask is your CPA, because they're gonna be the one that's

gonna have to be comfortable signing off on the return with that transaction.

It's a tough game to play, and I don't know, I'm trying to

remember, how long do you have to identify a property to close on a property in

1031 exchange?

Is it

1031 you have 45 days to identify and 180 to close on it.

You know, 45's part of the 180 obviously, but.

Yeah, you could play the game if your CPA signs off on it of having

that 1031, up to 170 days and then cancel it and now you have another 180 days to

find an opportunity zone to invest in.

Yeah.

like a Amanda said, that's just one of those things that's like, yeah.

Hasn't really been tested to our knowledge, you know, so it's kind of like,

I'm not saying, I'm not saying, Hey everybody, go do that.

I'm not saying that talks, talk to your own tax.

We're all saying run, run to the back of

the room and, and do your own.

O-zone, uh, failed 1031 on an O-zone (Opportunity Zone) investment right now.

Yeah, no, that's not what I'm suggesting.

alright, so can you, are there any recent, tax reforms on passive real

estate investments that, individuals can adapt their investment strategies

in response to these changes?

Or have things been fairly static since what, 2017?

That's a, that's great question.

Yeah, that's a, I mean for I, specifically for passive investors,

I really can't think of much, in terms of tax law changes.

Obviously for all investors, um, the, the more significant change from 2022 to 2023

is the reduction of bonus depreciation.

So in 2022, we had 100% bonus depreciation.

versus now fast forward to 2023, tax return year, bonus is now at 80%.

Which is not the end of the world.

It's still really great.

for decades we've just had no bonus.

to even, continue to have 80% bonuses, usually results in a pretty

significant tax savings, when it comes to real estate investments.

And, especially for syndications, cuz we're talking about larger

numbers, that the tax benefits are, we're seeing are still pretty good.

The thing that comes to my mind is, It's been pretty

status quo for the last couple years.

and I say that, all political commentary aside, but, president and his team,

they've various times the last two or three years they've tried to, they put

out proposals that they want to change drastically, change certain things with

respect to real estate or taxes and stuff.

And, whatever reason things haven't passed yet or not gonna pass, who knows?

But, so that's why I say it's stayed, more or less static quo.

But they keep.

They keep bringing it up and keep talking about it.

So it's something to stay, keep on the radar because obviously that could

change a month from now for that matter,

Yeah.

it's always, I always tell people it's important to remember that a

lot of these members of Congress and the Senate all own real estate.

Yes.

And so it's always, as much as they may get on TV and be talking

heads about the evils of tax dodging real estate investors, a lot of them are tax

dodging real estate investors, right?

and I don't mean that in a pejorative term at all.

so what are some common tax pitfalls that passive investors should.

Avoid when they're investing in real estate Syndications

Um, well, I don't know if it's a, I don't know if it's a

pitfall, but I think we see this a lot and especially with our syndication clients

and you get investors coming back two months after the K-1s issued, but just

make sure that you are investing in the name slash entity slash ID number that you

want to invest in and that, When you get a K-1, that it shows the same, reflects the

same information that it's supposed to.

it's a, it sounds like a silly thing, but it's one of those

things that you see it get, it gets overlooked so often that it's, it

is some worth mentioning for sure.

Yeah.

Yeah.

so when you get your K-1, take a look at it.

Don't wait until October to open it up and realize, oh man, that

should have been in my 401k's name somehow to show up in my name.

Now I gotta pay taxes on it.

I think another, I think common, I don't know that, again, it's not a pitfall, we

have investors who invest in syndications and, when we're doing tax projections,

they'll say, oh, I'm expecting.

$30,000 from this particular syndication.

So help me factoring in how much taxes I have to pay.

it's really important for investors to understand that when you get a

distribution from the syndication, it does not automatically

mean that is taxable income.

Like we said, earlier in, in our, podcast that frequently what happens is you'll

get cash distributions, but on the tax return side for the K-1, you might.

Tax losses.

so this something ways have the investor go back to the sponsor and say, okay,

was this just distribution or was this some kind of a taxable event?

Such as getting an understanding that just because you got money

distributed does not always translate into I have to pay taxes on this year.

I think, uh, couple I, another that comes to my mind is,

this surprises investors sometimes too, is if you're investing in syndications

or buying assets in multiple states.

You may be getting, various state K-1s and you may or may not have a

requirement to file state tax returns.

So that'll be something to discuss, with your CPA ahead of time as well.

Just, they're not always to get to file the state K-1s.

There's, some thresholds or some materiality you may wanna talk about

with your cpa, but something to be aware of and don't be shocked if you

know it's investing in six states and all of a sudden you get six K-1s

that go along with your regular K-1.

Gotcha.

All right, last question partly because I want to hear your experience and also,

so I want people to understand that we're not talking about this abstractly.

We're not, we're talking about this from your personal experience, but you guys

are, you guys have been LPs and real estate syndications yourselves before.

what are some of the things that you've seen?

From a tax savings perspective that have perhaps surprised you.

and then lastly, are there any, do you have any advice for someone who is looking

to invest with a sponsor about how to properly vet the sponsor or the deal?

I think, yeah, I'll touch on the surprise one.

I think, it comes down to making sure you have your line of communication

open with your personal CPA.

On the negative side surprises are sometimes passive investors hear

the sponsors talk about all these great tax benefits of investing in

real estate syndication, and they are anticipating a huge refund.

Because they're just thinking, wow, I'm gonna get a hundred thousand dollars of

write off, therefore I'm not paying taxes on my W2 income, on my business income.

And that may or may not be true, right?

So you as the investor have to do some planning with your personal CPA to get

ahead of the game and figure out, how or what are some things I can do to

make sure I maximize my tax savings?

So just because the syndication gives you the loss, doesn't

automatically mean you can utilize it.

There's still gonna be some effort needed for the tax planning.

I think that's the biggest surprise.

I think on the flip side, we also do have investors who are not

aware that the syndication losses can benefit them because they

have other taxable passive income, whether through their own properties

that they've held for many years.

Or we have physicians who will invest in other medical facilities that are

generating lots of passive income.

So even though they're passive with respect to the syndication, those losses

are being able to offset some of their income from other passive sources.

so for that's sometimes like a welcomed surprise.

And I, I think in terms of, vetting, for those investors

out there, maybe on the newer end or, just not sure how to go about it.

I think a couple things that come to my mind is, understand obviously who the

sponsor team is, who the syndicators are.

Seems like a silly and easy thing to do, but, go and Google

their name and type fraud after the name for an extreme example.

And just kinda, I don't know, you never know what's gonna pop up.

But definitely...

SEC, that's another one.

Yeah.

"John Smith and SEC" we wanna make sure they're not in trouble.

Do your background, background search on the syndicators.

that's really important.

you don't have to be a, you're not maybe be a real estate pro, but,

understand the marketplace you're going.

They're gonna be investing in to some extent, and.

Are you comfortable with the time horizon?

Is it a five year hold?

Is a 10 year hold?

Is it, are they buying more than one property?

Are they diversifying?

Do all those kind of things where it's, you gotta understand the investment.

and some of these syndications are gonna be straightforward.

It's gonna be, 70% profit goes to the LPs and 30% goes to the sponsor team.

Some are gonna be four layers of that.

And, you just gotta, again, you don't have to be an expert, but you gotta, you should

be comfortable and understand it enough to have a conversation about it and show it

to your CPA and make sure they understand it because, sometimes people are, maybe

they're more on the, I don't know.

Simple, simple side of things.

And the idea of investing in something that has five layers of a waterfall

provision that just gives 'em a headache thinking about it, And if that's

the case, then that's totally fine.

There's nothing wrong with that.

It's,

yeah, investors are reading that.

Yeah.

You just got, you gotta be comfortable with what you're investing in.

Obviously it's your money and you've earned it.

You know, you wanna make sure you protect it as best you can.

Yeah.

We, we have a pretty, our syndication, we have a pretty simple, we just

basically, We have an equity split, that basically happens after we've

paid back the preferred return.

And that's pretty much it.

and I'm I'm mystified by, I don't mind the waterfalls at all.

I kinda like sometimes when they've got 'em, cuz it shows a sort of

a target alignment of interest.

They've gotta hit certain performance targets for them

to get paid, but I'm with you.

It makes my head hurt a lot of the time and I don't really like investing

in things that make my head hurt.

And the other thing that you bring up is that how important

it is to vet the sponsor.

And I almost tell people it's more important for you to vet the sponsor than

it is for you to vet the deal because

yeah.

Chances are, the reason you're investing passively in

this stuff is cuz you don't know much.

You're not an expert in this, so don't expect to become an expert in

real, in multifamily syndication or mobile home parks or self storage.

Look for an operator who's the expert and who has a good track

record and a good reputation.

Start there.

and then, yeah, look at the market, dig into the market a little bit,

and if the market gives you the heebie-jeebies, don't invest.

All right.

Amanda and Matt, thank you so much for sharing with our audience today.

You've got your book Tax Strategies for the Savvy Investor.

We will put that link in the show notes, but if our audience wants

to reach out to you and find out more about you, where would be the

best place for them to do that?

I think our website is likely the best place.

We have a lot of great, free resources people can download.

We have a tax savings toolkit, that has a lot of great

information and also includes a.

a assessment.

I think one of the questions we get a lot from investors is like, how do

I know if I'm overpaying in taxes?

So we created an assessment that allows people to go through a series of questions

on their own, and arrive at kind of what their, their grade is gonna be.

And I think, as a result, it gives people an opportunity to see what are

some of the areas where they could improve on with respect to tax planning.

So yeah, keystonecpa.com is the best place and for anyone who's looking for

kind of daily tax tips, the best place to find me is on Instagram as @AmandaHancpa

and I'm on there every once in a while

when she adds me to her videos.

Gotcha, gotcha.

/ All right, it was a pleasure talking to you guys today and thanks for sharing.

Thanks, Neil.

Thanks everyone.

Appreciate it.

Thank you so much for listening and watching the

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